Harrisburg school tax increased by 3 1/2 percent.

Harrisburg School District has announced a three and one half percent (3 1/2 % )  real estate tax increase as part of its new budget.  WGAL has more details. 

Detroit debt default and impact on solvent municipalities

From Bloomberg comes the story of how Detroit's recovery plan may impact the municipal bond market throughout Michigan:

Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.

Investors have viewed municipal bonds as "safe" for decades because municipal governments could always raise taxes to pay back the principal and interest.  Should local governments lose that power, local debt would be no more safe than corporate debt (probably less so - as corporations are constrained by the profit motive in their daily operations). 

Should investors lose confidence that cities can or will raise taxes no matter how much debt they acccumulate, the bond market will suffer far beyond Michigan.  Cities have incurred debt and expenses that today's economy cannot support.  Cities and other municipalities have been looking to other sources of revenue for years, as they turn their police and code officials into little more than bridge trolls. Muncipal employees (more and more) now demand money in exchange for safe passage (or permission to conduct business) instead of acting for purposes related to legitimate public safety concerns.  This trend will continue if municipalities have a harder time selling bonds.

Impairment of the bond market will also impact local officials' operation of school districts, sewer plants and public water - with resulting changes in school taxes, sewer rates and water rates.

It will take more than default by Detroit to affect local governments and local taxes in Pennsylvania.  But Detroit is not the only city that is facing or has faced these choices.  Even the federal government cannot print enough dollars to bail out every city in the country. 

Harrisburg is only a little further from the brink than Detroit.  Maybe Harrisburg can count on a massive bailout by the federal government.  Maybe it can't.  But it would be wise for local governments across Pennsylvania to consider scaling back operations and ambitious plans for sewer expansion and other adventures before they face a choice between (1) borrowing in a hostile bond market or (2) raising taxes and fees on already overextended residents. Whether a township is solvent or not, the ability to raise funds through the bond market may be seriously compromised by a municipal default by any city in Pennsylvania.

Gary, Indiana to sell 7,000 properties for $1.00 each.

Gary, Indiana has proposed two steps that may predict the future for cities across the country:

 

(1) The Daily Mail reports that the City would like to operate on 40% less land.  40% of Gary's land would "return to nature" under this plan.

 

(2)  Gary owns 7,000 properties (compared with the roughly 500 owned by Harrisburg, PA).  Gary proposes to sell these properties for $1.00 each. 
  

• In the next few months the city is planning to auction off the housing for $1 each.
• The homes would each need $15,000-$30,000 in repairs.
• Buyers would have to agree to renovate their purchases as quickly as possible.
• If buildings are beyond repair, NBC reports that a 'deconstruction' program could be initiated - to take apart buildings and recycle materials.

This approach fails to recognize the title defects that result from prior tax sales.  The City is unable to convey good title to these buyers.  The buyers will have to file quiet title actions (against prior owners) in order to clear the title and obtain financing for the repairs. 

 

Despite the flaws in this proposal, urban consolidation is an approach that will become almost mandatory as municipalities struggle with declining revenues and increasing service costs.

 

Compare this approach with the approach taken by Detroit in recent years. 

  

Update - August 25, 2013
Tara Steele provides more information on the "catches" in this program.